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Why Facebook Is a Contrarian Investor’s Nightmare

By Tim Brugger – Mar 11, 2014 at 2:00PM

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The social media giant's stellar share price run has contrarians coming out of the woodwork. Too bad for them.

After the kind of run Facebook (META 1.97%) shareholders have enjoyed the past year, it's no wonder the number of investors betting on a share price drop -- as measured by the number of put options sold recently -- has ratcheted up the past couple weeks. The put/call volume ratio is now 77% higher than last year at this time. Of course, betting against the market is what contrarians do, and Facebook is an easy target right now.

The problem for contrarians is that too often they don't take the time, or don't have the inclination, to examine why a company like Facebook is on a hot streak. That's that's why all those investors selling Facebook short are going to be sorely disappointed. In fact, when it comes time to make good on their short positions, Facebook bears are likely to give its stock price a boost. Talk about irony.

Why there's more on the way
While 38 of the 49 analysts who cover the company have a buy rating on Facebook, the majority have found themselves in a rather interesting situation. According to an analysis by Bloomberg, 21 of the 38 bullish Facebook analysts have price targets below Monday's closing price of $72.03 a share. Why? Because very few expected Facebook's stock price to jump as quickly as it has, playing right into the hands of all those contrarians.

As the analysts begin to catch up -- several have upped Facebook's price target recently to better reflect its upside potential-- the more important question is whether Facebook's rapid rise is warranted. The good news for shareholders is there are several reasons why it is.

It's been nearly two years since Facebook spent $1 billion to acquire Instagram, a deal many questioned as Facebook prepared to go public. At the time, Instagram had only been in existence for a couple of years, and Facebook's value was nowhere near what it is today. But even then CEO Mark Zuckerberg and team had a definitive plan to go mobile, and Instagram had already established itself as a big player in the space.

Now Instagram, with its 150 million monthly average users, has become an advertiser's dream. According to a recent study of nearly 250 brands, interaction rates on Instagram are 15 times higher than even Facebook. Advertisers will pay for success, and they're getting it on Instagram, just as with Facebook itself. The smooth integration and monetization of Instagram is likely part of the reason many investors have taken a wait-and-see approach to Facebook's mammoth $19 billion WhatsApp acquisition.

The successful transition to mobile -- 945 million of Facebook's 1.23 billion monthly average users access their accounts via a mobile device -- the recent introduction of video ads, and successfully utilizing its reams of user data to improve advertising results are why Facebook is on a record-breaking tear. That success will continue in the foreseeable future, despite the short-sellers.

A few specs
What the contrarians either don't know, or refuse to acknowledge, is that Facebook is coming off its best quarter ever, by a host of measures, substantiating its share price jump. Though the company is hardly the least expensive digital marketing alternative, advertisers spent more in the fourth quarter of 2013 on Facebook spots than ever before. Why? Because it works.

Nearly every matrix important to advertisers improved on Facebook last quarter, and last year, including click-through rates, revenue per click, and the number of mobile ads. Oh, and for those Facebook naysayers who raise the question of waning interest among teens, 84% of marketers' ad spend last quarter targeted consumers over the age of 25.

Final Foolish thoughts
Facebook's 32% share price pop year to date, and 156% the past 12 months, is exactly what contrarians thrive on. But like most contrarian investors, that's short-term thinking. If you're in search of a growth alternative for the long term, you'd be hard-pressed to find a better one than Facebook, even after its stellar run. The question isn't whether Facebook stock price will hit $100 a share, it's when.


Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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